Reputation Management: The Trust Reservoir Is Empty

The news of the day brings a stream of stories about well-known companies running into problems that put their reputations at risk.

We seem to be living in an age of corporate crises. In recent memory, we’ve seen some of the world’s most recognized companies (Toyota, Goldman Sachs, BP, to name just a few), all leaders in their industry, battling reputational crises. J.P. Morgan’s trading losses, the hacking scandal at News Corp, or Apple's issues over working conditions at supplier Foxconn’s Chinese factories are just the most recent examples. Non-profits face similar changes as the controversy over the Susan G. Komen Foundation or the Penn State scandals indicate.

These crises are just the tip of the iceberg. The root causes go deeper. Trust in business has been eroding at a steady pace over the last decade and CEOs are now among the least trusted professionals. Four main factors are responsible for the increase in reputational risk.

First, media coverage, whether traditional or social, has dramatically increased globally. This increased scrutiny has made it virtually impossible for companies to hide. Transparency is expected, while companies have less control over their messages; once an issue is on the Web, it will likely stay there forever.

The second factor is an unexpected consequence of globalization. The globalization of activist organizations has matched the global reach of companies. NGOs have increasingly succeeded in forcing private regulation: the “voluntary” adoption of rules and standards that constrain certain forms of company conduct without the involvement of public agents. In many cases, the mechanism driving change is the creation of reputational crises for globally operating companies that, when effective, leave the companies with no choice but to change their business practices.

Third is a shift in expectations about corporate conduct, especially among younger population segments. Evidence for these trends can be found in the explosive growth of areas such as corporate social responsibility, sustainability and socially responsible investing. Some critics have dismissed these trends as passing fads that lack impact, but reputational crises are increasingly being driven by moral outrage, whether over environmental concerns or executive perks.

The final factor is the rise of business models based on trust. To develop unique customer experiences and solutions, companies need to get closer to customers’ unarticulated—perhaps even unconscious—desires and needs. This requires trust. While this shift has undoubtedly created new opportunities for value creation, even the mere perception of broken trust will lead to a feeling of betrayal, a strong emotion indeed.

How have companies responded to these trends? Poorly. Most companies still view stewardship of the company’s reputation as a narrow issue best left to the PR department. For the most part, the response is an underfunded initiative greeted by nervous questions from the board. Underdeveloped capabilities in the presence of growing reputational risks will lead to an increase in reputational crises. That mismatch is untenable.

Business leaders and corporate boards are starting to take notice, but are unsure what to do. Most companies still believe that building a strong reputation is easy and only requires common sense; it is merely a natural consequence of doing right by customers, employees and business partners. This approach is flawed. Good business practices are important, even necessary, but they are not sufficient for successful reputation management. A company’s reputation needs to be actively managed by the business leaders, led by the CEO as the steward of corporate reputation. While experts such as public relations specialists may play an important role, they should not own the process. The reason is that challenges to a company’s reputation typically arise out of a specific business decision, but reputational risk awareness is not part of the decision process.

Successful reputation management is difficult. It requires a high level of strategic sophistication and mental agility that sometimes runs counter to day-to-day business decisions. A company’s reputation is shaped not just by its direct business partners, customers and suppliers, but also by external constituencies. Frequently, constituencies that have lain dormant for many years can suddenly spring into action, particularly in the case of reputational crises. Companies need to have a process to identify such risks.

A company’s reputation consists of what others are saying about the company—and not just its business partners and customers. It is essentially public. This necessitates the ability to assume external actors’ perspectives and viewpoints, especially when they are critical or even hostile toward the company. This requires a strategic rather than defensive approach by business leaders. Anger or self-pity are not helpful.

A strategic approach requires the emotional fortitude to treat reputational difficulties as understandable — and even predictable — challenges that one should expect in today’s business environment. As a result, companies should handle reputational crises like any other major business challenge: based on principled leadership and supported by sophisticated processes and capabilities that are integrated with the company’s business strategy and culture.

About the Author: Daniel Diermeier is IBM Professor of Regulation and Competitive Practice at the Kellogg School of Management at Northwestern University where he teaches in the school’s MBA and Executive Education programs. He is author of the recent book Reputation Rules: Strategies for Building Your Company’s Most Valuable Asset.